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Pro Analysis

Historic S&P 500 turnaround means big gains ahead

A trader works on the floor of the New York Stock Exchange shortly before the closing bell, June 29, 2015. U.S. stocks fell sharply in heavy trading on Monday and the S&P 500 and the Dow had their worst day since October after a collapse in Greek bailout talks intensified fears that the country could be the first to exit the euro zone.
Lucas Jackson | Reuters
A trader works on the floor of the New York Stock Exchange shortly before the closing bell, June 29, 2015. U.S. stocks fell sharply in heavy trading on Monday and the S&P 500 and the Dow had their worst day since October after a collapse in Greek bailout talks intensified fears that the country could be the first to exit the euro zone.

Back on June 28, we published a B.I.G. Tips report looking at the extent of the two-day sell-off following the Brexit vote and how it had reached historic levels on a short-term basis. In that report, we provided an analysis of how the S&P 500 performed following prior periods of extreme oversold readings and noted that forward returns were positive.

While the magnitude of the positive returns we highlighted was not as strong as what we have seen in the last two weeks, the direction was the same. One chart we included from that report on 6/28 showed the S&P 500's trading range as measured by standard deviations that the index was closing above or below its 50-day moving average (DMA).

For reference, anything within one standard deviation is considered a "normal" level, while anything more than one standard deviation above (below) is considered overbought (oversold). The chart showed that the S&P 500 went from 1.6 standard deviations above its 50-DMA to 3.2 standard deviations below in the span of two trading days. In the history of the index dating back to 1928, that was the most extreme two-day move on record.

So what has happened since then?